Freddie Mac 2009 Annual Report Download - page 142

hold the mortgage assets or have guaranteed mortgages in connection with the issuance of a PC, Structured Security or other
mortgage-related guarantees.
Institutional Credit Risk
The financial strength of many of our counterparties continued to deteriorate in 2009, and we expect challenging market
conditions to continue to adversely affect the liquidity and financial condition of our counterparties in 2010. Despite federal
intervention, bank failures rose substantially in 2009, and many of our counterparties experienced ratings downgrades. Our
exposure to mortgage seller/servicers increased substantially in 2009 with respect to the risk that they will not perform their
repurchase obligations arising from breaches of representations and warranties made to us for loans they underwrote and sold
to us. During 2008 and 2009, we terminated our arrangements with certain mortgage seller/servicers due to their failure to
meet our eligibility requirements and we continue to closely monitor the eligibility of mortgage seller/servicers under our
standards. The financial condition of mortgage insurers and bond insurers also continued to weaken in 2009, which increases
the risk that these entities will fail to fulfill their obligations to reimburse us for claims under insurance policies. In 2009,
regulators deemed the financial condition of certain bond insurers to be impaired and ordered such insurers to restructure to
relieve the impairment. We are concerned that other bond insurers may be subject to a similar assessment in 2010, and some
or all may be unable to restructure to relieve the impairment and may be deemed to be insolvent. Our exposure to
derivatives counterparties remains highly concentrated as compared to historical levels.
A portion of the increased provision for loan losses we recognized during 2009 was due to institutional counterparties
that failed to pay us or for which we have substantial uncertainty regarding their ability to perform their obligations to us.
The failure of any other of our primary counterparties to meet their obligations to us could have additional material adverse
effects on our results of operations and financial condition.
Mortgage Seller/Servicers
We acquire a significant portion of our single-family mortgage purchase volume from several large mortgage lenders.
Our top 10 single-family seller/servicers provided approximately 74% of our single-family purchase volume during 2009.
Wells Fargo Bank, N.A. and Bank of America, N.A. accounted for 27% and 11%, respectively, of our single-family
mortgage purchase volume and were the only single-family seller/servicers that comprised 10% or more of our purchase
volume for 2009. During 2009, our top three multifamily lenders, CBRE Melody & Company, Deutsche Bank Berkshire
Mortgage and Berkadia Commercial Mortgage LLC (which acquired Capmark Finance Inc. in December 2009) each
accounted for more than 10% of our multifamily mortgage purchase volume, and represented an aggregate of approximately
40% of our multifamily purchase volume.
We are exposed to institutional credit risk arising from the potential insolvency or non-performance by our mortgage
seller/servicers, including non-performance of their repurchase obligations arising from breaches of the representations and
warranties made to us for loans they underwrote and sold to us. Pursuant to their repurchase obligations, our seller/servicers
repurchase mortgages sold to us, whether we subsequently securitized the loans or held them in our consolidated balance
sheet. In lieu of repurchase, we may choose to allow a seller/servicer to indemnify us against losses on such mortgages.
During 2009 and 2008, the aggregate unpaid principal balance of single-family mortgages repurchased by our seller/servicers
(without regard to year of original purchase) was approximately $4.1 billion and $1.8 billion, respectively.
Some of our seller/servicers failed to perform their repurchase obligations due to lack of financial capacity, while many
of our larger, higher credit-quality seller/servicers have not fully performed their repurchase obligations in a timely manner.
As of December 31, 2009 and 2008, we had outstanding repurchase requests to our seller/servicers with respect to loans with
an unpaid principal balance of approximately $4 billion and $3 billion, respectively. At December 31, 2009, nearly 30% of
our outstanding repurchase requests, or $1.1 billion, were outstanding more than 90 days. Three of our larger, higher credit
quality seller/servicers had more than 30% of their repurchase obligations outstanding more than ninety days at
December 31, 2009. Our credit losses may increase to the extent our seller/servicers do not fully perform their repurchase
obligations. Enforcing repurchase obligations with lender customers who have the financial capacity to perform those
obligations could also negatively impact our relationships with such customers and ability to retain market share.
Our seller/servicers have an active role in our loss mitigation efforts, including under the MHA Program, and therefore
we also have exposure to them to the extent a decline in their performance results in a failure to realize the anticipated
benefits of our loss mitigation plans. For information on our loss mitigation plans, see “Mortgage Credit Risk — Portfolio
Management Activities — Loss Mitigation Activities.”
Due to the strain on the mortgage finance industry in the past three years, a number of our significant single-family
seller/servicers have been adversely affected and have undergone dramatic changes in their ownership or financial condition.
Many institutions, some of which were our customers, have failed, been acquired, or received substantial government
assistance. The resulting consolidation within the mortgage finance industry further concentrates our institutional credit risk
139 Freddie Mac